For thousands of Non-Resident Indians (NRIs), selling property in India triggers one of the most complex tax challenges — capital gains tax on property sale. Disputes commonly arise over cost of acquisition, cost of improvement, and deductible sale expenses, often leading to inflated tax demands.

In a significant and precedent-setting judgment, the Income Tax Appellate Tribunal (ITAT), Bangalore, in the case of Vijay Lakhmichand Israni vs Income Tax Officer (Assessment Year 2022–23), has delivered crucial clarity on how NRI property sale capital gains must be computed.

The ruling directly impacts NRIs selling residential property in India, especially where the property was purchased long ago, renovated later, or supporting documents are old or incomplete.

Background: NRI Selling Residential Property in India

The assessee, a senior citizen NRI, jointly owned a residential villa in Bangalore. His share of sale consideration amounted to ₹4.02 crore. The property had originally been purchased in 2005 as an unfinished and uninhabitable structure. Subsequently, substantial expenditure was incurred to complete construction and make the property suitable for residence.

During assessment proceedings, the tax officer disputed three key claims made while computing long-term capital gains tax on property sale:

• Cost of acquisition
• Cost of improvement
• Expenses incurred in connection with transfer

The dispute ultimately reached the ITAT Bangalore.

Builder Payments Recognized as Cost of Acquisition

A recurring problem in NRI capital gains tax cases is the absence of old bank statements or detailed vouchers for property construction completed many years earlier.

In this case, the assessee claimed ₹11.35 lakh as cost of acquisition, representing payments made to the builder for civil work, plumbing, and electrical completion. The Assessing Officer disallowed the claim due to lack of bank records and cheque references.

However, the ITAT Bangalore accepted:

• Builder-issued payment statements
• Builder receipts
• Possession certificate confirming full payment

The Tribunal ruled that payments made to the builder to complete and make a property habitable form part of cost of acquisition, even if old bank statements are unavailable due to passage of time.

Result

₹11.35 lakh allowed as Cost of Acquisition

Impact for NRIs

This finding offers major relief to NRIs who purchased under-construction or unfinished properties in India many years ago and later completed construction.

Permanent Renovation Expenses Allowed as Cost of Improvement

The assessee claimed ₹25.72 lakh as cost of improvement, including expenditure on:

• Structural and electrical fittings
• Plumbing installations
• Rooftop solar systems
• Embedded wall and floor fixtures
• Interior construction work

The tax officer disallowed the entire claim by treating the expenditure as personal household items.

The ITAT Bangalore made a vital distinction:

• Permanent structural and embedded fixtures qualify as cost of improvement
• Movable personal appliances do not qualify

The assessee voluntarily classified ₹5.49 lakh as personal appliances. Accordingly, the Tribunal allowed ₹20.23 lakh as valid cost of improvement.

Result

₹20.23 lakh allowed as Cost of Improvement

Impact for NRIs

This ruling provides definitive guidance on what renovation and fitting expenses NRIs can claim as cost of improvement when selling Indian property.

Foreign Travel and Personal Visit Costs Disallowed

NRIs commonly travel to India to manage property sales. In this case, the assessee claimed ₹4.99 lakh towards:

• International air travel
• Hotel accommodation
• Meals and local travel
• Courier charges

Claimed as expenses incurred in connection with property transfer.

The ITAT Bangalore held that:

• Personal travel, boarding, lodging, and conveyance expenses are not exclusively connected to the transfer of property.

Result

₹4.99 lakh disallowed

Impact for NRIs

This conclusively clarifies that foreign travel or personal visit expenses cannot be claimed as deductible costs in NRI property sale capital gains computation.

Final Decision of the ITAT Bangalore

Both appeals partly allowed — resulting in substantial NRI capital gains tax relief.

Why This Ruling is a Turning Point for NRI Property Taxation

This ITAT judgment resolves long-standing uncertainties in NRI property sale taxation in India:

• Genuine builder construction payments qualify as cost of acquisition
• Permanent structural renovations qualify as cost of improvement
• Personal appliances and travel costs are not deductible
• Missing old bank records do not invalidate genuine builder payments

For NRIs selling Indian real estate after long holding periods, this ruling provides clear, defensible capital gains computation standards.

Practical Guidance for NRIs Selling Property in India

NRIs planning property sales should:

• Preserve builder receipts and possession certificates
• Maintain invoices for structural renovation work
• Clearly separate permanent fixtures from movable appliances
• Avoid claiming personal travel expenses
• Obtain professional capital gains tax computation before sale

Proper documentation ensures smooth assessment and minimizes tax disputes.

Specialized NRI Property Tax Advisory

Dinesh Aarjav & Associates, Chartered Accountants, provide dedicated NRI services, including:

• Planning for Capital Gains Tax for NRI
• Property sale tax computation
• Lower TDS certificate for NRI property sale
• DTAA and repatriation advisory
• End-to-end NRI income tax compliance

With over 25 years of experience and a global NRI clientele, we ensure lawful tax optimization, effective NRI tax planning, and complete compliance for NRI property transactions in India.

Conclusion

The ITAT Bangalore ruling in Vijay Lakhmichand Israni vs ITO establishes a crucial precedent in NRI property sale capital gains taxation. By recognizing genuine acquisition and improvement costs while rejecting personal expenditure claims, the Tribunal has provided long-awaited clarity for selling NRI property in India.

NRIs can now rely on this judgment to structure their documentation, compute capital gains correctly, and achieve legitimate tax relief.

Also Read:

TDS on Sale of Property by NRI

Tax Exemption for NRIs on Property Sale: Understanding Capital Gains and Investment Options

Lower or Nil TDS Certificate for NRIs Selling Property in India — Complete Guide to Form 13 and Section 197

NRI Selling Property in India? Here’s How a New ITAT Ruling Can Help You Save Lakhs in Capital Gains Tax